Freddie Mac Back On Hook for Subprime Loan Claims

(CN) — An Ohio retirement fund can sue Freddie Mac for claims it concealed a $2 billion loss on risky mortgages from investors before a 2007 financial report sent its stocks reeling, the Sixth Circuit ruled Wednesday. The Ohio Public Employees Retirement System, also known as OPERS, sued the Federal Home Loan Mortgage Corporation in January 2008, alleging that the government-sponsored mortgage broker lied about the number of subprime loans it purchased in 2006 and 2007. Following the release of a financial statement revealing a $2 billion loss on Nov. 20, 2007, Freddie Mac’s stock dropped 29 percent in one day, resulting in shareholder losses of over $6.6 billion. In its complaint, OPERS claimed “the drop in [stock] price ‘confirms empirically that the market was previously unaware of the full extent of Freddie Mac’s exposure to, and risk from, non-traditional mortgages.” Freddie Mac blamed the price drop on the financial crisis. U.S. District Court Judge Benita Y. Pearson ruled for Freddie Mac, citing several of the mortgage giant’s annual reports in her opinion, pointing out how their disclosures run counter to OPERS’ argument. “Before November 2007, Freddie Mac had already disclosed that it was increasing its purchase of non-traditional mortgages products that may default more often,” she said. But the Sixth Circuit disagreed Wednesday, ruling that OPERS had adequately alleged Freddie Mac misled investors about the qualities of its loans and rigors of its underwriting process. “Freddie Mac claimed that .01 percent of the loans in its single family portfolio were subprime, while OPERS alleges this number is closer to 12 percent when low quality loans like CI, C2, and EA are considered,” Judge Jane Stranch said, writing for the three-judge panel. “It also alleges that Freddie Mac made no public disclosure of its Alt-A holdings until June 2007, well into the class period, reporting that they made up 8 percent or $120 billion of the portfolio when such loans actually consisted of $462 billion or 29 percent of the portfolio.” OPERS reportedly found an email by the then-head of external reporting that recommended changing a proposed speech by CEO Richard Syron so as not to include the statement, “At the end of 2006, Freddie had basically no subprime exposure in our guarantee business.” The email says, “Certainly our portfolio includes loans that under some definitions would be considered subprime,” although Freddie Mac used a very narrow definition of subprime in its public disclosures to avoid characterizing its holdings as such, court records show. However, Syron included the subprime language in his speech at the USB Global Financial Services Conference, and Executive Vice President Patricia Cook repeated it at the Lehman Brothers Tenth Annual Financial Services Conference. “OPERS need only allege sufficient facts to support a plausible claim — not the most likely — at this stage,” Judge Stranch wrote. “Having considered ‘the relationship between the risks allegedly concealed and the risks that subsequently materialized,’ as well as the close correlation between the alleged revelation or materialization of the risk and the immediate fall in stock price, we conclude that it has done so.”